U.S. equities enjoyed strong gains in the third quarter of 2013 as continued monetary stimulus and signs of a global economic rebound outweighed concerns about slowing corporate profit growth. The Federal Reserve bolstered investor sentiment early in the quarter by quelling worries that it would soon increase short-term interest rates. Markets peaked in mid-September after the Fed unexpectedly delayed tapering its asset purchase program. Stocks also received a boost from signs that the eurozone recession had ended and that emerging market economies seemed to be regaining traction. Markets fell in the period's closing weeks, however, due to concerns about the underlying strength of the U.S. recovery and the potential impact from a looming budget stalemate in Washington. All market capitalization ranges posted solid gains, with small- and mid-cap shares outpacing their large-cap counterparts. According to various Russell indexes, growth stocks outperformed value shares across all market capitalizations.
The Growth & Income Fund returned 6.52% in the quarter compared with 5.24% for the S&P 500 Index and 5.70% for the Lipper Large-Cap Core Funds Index. For the 12 months ended September 30, 2013, the fund returned 20.45% versus 19.34% for the S&P 500 Index and 21.34% for the Lipper Large-Cap Core Funds Index. The fund's average annual total returns were 20.45%, 9.72%, and 7.43% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.69% as of its fiscal year ended December 31, 2012.
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A small position in materials as well as larger allocations to consumer discretionary and industrials and business services were the portfolio's top-performing sectors for the period. The consumer staples allocation lost ground, as did modest positions in utilities and telecommunication services. Consumer discretionary is among the portfolio's larger overweight allocations versus the benchmark as companies in the sector have the potential for consistent, durable earnings growth at broadly favorable risk/reward profiles. We believe the U.S. consumer is on more stable footing due to low interest rates and inflation, as well as to improvements in the labor and housing markets. Overall, we remain somewhat cautious on the energy sector. Despite a recent uptick due to geopolitical tension in the Middle East, we expect energy prices to remain muted because of weak demand and production growth in North America. We are focused on companies with low cost structures, access to reliable and high-quality sources, and solid production growth.
We expect modest U.S. economic growth over the next several quarters, supported by the continued recovery of the domestic housing market, moderate employment growth, and muted inflation. Healthy balance sheets and good cash flow offer corporations some flexibility in capital deployment, which could boost shareholder-friendly actions, including share repurchases and dividends. Although the Fed will likely begin tapering its asset purchase program in the coming months, we expect overall monetary policy to remain accommodative for some time. Partisan budget battles in Washington could weigh on growth. Barring a prolonged government shutdown, and particularly, a failure to reach an agreement on the debt ceiling, fiscal headwinds should fade going into year-end. Regardless, our investment approach remains the same: We look to buy and hold high-quality growth companies with strong earnings and cash flows that offer a combination of capital appreciation and income growth.